Universal credit: the essential guide

The flagship policy in the government's welfare reform programme is being piloted on 29 April and is due to go live nationally this October.
Study the issue in depth and learn all you need to know about what happens next with our essential guide

Protesters demand a cap on rents not benefits in Stratford, London. The overall benefit cap is part of the governments welfare reforms, along with the bedroom tax, changes to council tax benefit and universal credit. Photograph: Gail-Orenstein/Demotix/Corbis

1. What is universal credit?

Universal credit (UC) is the flagship policy in the government's welfare reform programme (pdf), billed as representing the biggest change to the welfare system since the 1940s. It is designed to simplify the benefits system. The government wants the system to "ensure that work always pays and is seen to pay" and to encourage people to see work as the best route out of poverty.

The secretary of state for work and pensions, Iain Duncan Smith, has promised: "Universal credit will mean that people will be consistently and transparently better off for each hour they work and every pound they earn." The current system of means-tested out-of-work benefits, tax credits and support for housing will be replaced by a single income-replacement benefit.

The government hopes the reform will:• Simplify the system.• Reduce the financial and administrative barriers to taking up work.• Make it easier for people to understand how much they will gain by taking a job.• Create greater incentives to take up work.• Prepare out-of-work claimants for their next job.• Reduce the amount spent on administration and tracking down fraud and error.• Reduce (in the longer term) the number of children and adults living in poverty.• Reduce the number of workless households by always ensuring that work pays.

2. How is the system different?

In theory, most claimants will apply online and manage their claim through an online account, making the system cheaper to administer. It will be available to people who are in work and on a low income as well as to people who are out of work.

It will merge out-of-work benefits and in-work support (pdf), so claimants should not feel they are taking a risk as they move from one system to another. Universal credit is intended to improve work incentives by ensuring that support is reduced at a consistent rate as people return to work.

Most claimants on low incomes will still be paid universal credit when they first start a new job or increase their part-time hours. Claimants will receive just one monthly payment, paid into a bank account in the same way as a monthly salary. Support with housing costs will go direct to the claimant as part of their monthly payment, rather than to the landlord.

3. When does it begin? Is it on track?

Universal credit will go live nationally in October 2013. A pilot programme was due to begin in Tameside, Oldham, Wigan and Warrington from the end of April 2013. These pilots were designed to identify where changes needed to be made to "ensure the new service is robust and reliable when universal credit goes live nationally in October 2013", the Department for Work and Pensions (DWP) said.

But in March (in the news dead zone, on the Thursday evening before Good Friday) the DWP announced that three of the four pilots (Wigan, Warrington, Oldham) had been postponed until July, and only the Tameside pilot would happen on schedule in April (launching Monday 29 April).

Labour said universal credit was "on the edge of disaster", claiming that IT systems needed for it were not yet ready. The shadow work and pensions secretary, Liam Byrne, said: "This is yet another embarrassing setback for universal credit." A DWP spokesperson said there had been no delay, and that the pilots rollout needed to be gradual. The government has been deliberately vague about the precise timetable for rollout, allowing it to deny that there have been any delays.

The broad timetable states that universal credit will start to take new claims from unemployed people in October 2013. For people in work this process will begin in April 2014. The remainder of current claims will be moved to universal credit from 2014, with the process being complete by 2017.

4. Why is the government pushing for reform?

The chancellor, George Osborne, said in his keynote speech on welfare reform in April: "The benefit system is broken; it penalises those who try to do the right thing; and the British people badly want it fixed. We agree – and those who don't are on the wrong side of the British public." He pointed to the development of universal credit as part of the answer.

Under the current benefits system, the financial gains of taking a job can be very small. Many workers have most of any increase in earning deducted from their benefits and tax credits payment, with some households facing deduction rates as high as 91%, the DWP says.

"This problem is compounded by the administrative complexity of the system. There are separate systems for out-of-work and in-work support delivered by different parts of government. A move into work therefore entails a recalculation of entitlement, multiple communications and possible delays and gaps in payment. As a result, many people are not prepared to take the risk of moving into work," the DWP says.

"In around 1.1 million households, a person would currently lose between 70% and all of their earnings if they move into work of 10 hours a week. The incentives to increase hours once in work are also very weak. Under the current system around 700,000 individuals in low-paid work would lose more than 80% of an increase in their earnings because of higher tax or withdrawn benefits.

"The current system of benefits provides targeted support to meet specific needs, but the net effect is a complex array of benefits which interact in complicated ways, creating perverse incentives and penalties, confusion and administrative cost. This has the effect of preventing many in our society from seeing work as the best route out of poverty. It also increases the risk of error and the opportunities for fraud."

The UC system introduces higher earnings disregards, a 65% taper rate, and more "conditionality" (introducing new responsibilities, such as mandated work placements, for claimants). There are new sanctions for those who do not comply with the regulations.

The DWP promises that UC will improve work incentives in three ways:• Ensuring that support is reduced at a consistent and predictable rate, and that people generally keep a higher proportion of their earnings.• Ensuring that any work pays and, in particular, low-hours work.• Reducing the complexity of the system, and removing the distinction between in-work and out-of-work support, thus making clear the potential gains to work and reducing the risks associated with moves into employment.

5. Does the reform tie in with the government's "skivers and strivers" rhetoric?

In the universal credit white paper (pdf), the government argues: "Welfare dependency has become a significant problem in Britain with a huge social and economic cost." The new benefit will be "leaner" and "firmer".

"The UK has one of the highest rates of children growing up in homes where no one works and this pattern repeats itself through the generations. Less than 60% of lone parents in the UK are in employment, compared to 70% or more in France, Germany and the Netherlands … Universal credit will start to change this. It will reintroduce the culture of work in households where it may have been absent for generations," the white paper argues.

6. Whose idea was it?

All parties have talked about the need to reform the complex benefit system, but the concept of universal credit came directly out of work done by the Centre for Social Justice (CSJ), the thinktank launched by Iain Duncan Smith while in opposition in 2004.

"Too much of our current system is geared toward maintaining people on benefits rather than helping them to flourish in work; we need reform that tackles the underlying problem of welfare dependency," he said.

The CSJ produced a report in 2009 called Dynamic Benefits: towards welfare that works, which stated: "Work must be supported as the principal route out of poverty. We propose replacing the current confusing array of benefits with a 'Universal Credit' – a simpler, more cost-effective system that provides greater rewards for work."

It proposed a new system to taper the withdrawal of benefits so that claimants no longer faced a "cliff-edge withdrawal" when they go into work.

The new coalition government made UC the key element in its welfare reform programme in 2010.

8. Which benefits remain?

Critics point out that universal credit is not entirely universal, given that it does not embrace all benefits into one simplified system. A large number of benefits remain, including:• Contribution-based JSA.• Contributory ESA (limited to 52 weeks for those in the work-related activity group).• Attendance allowance (AA) and disability living allowance (DLA) for children.• Carer's allowance.• Bereavement benefits.• Industrial injuries disablement benefit and war pensions.• Maternity allowance; statutory sick/maternity/paternity/adoption pay (these will be treated as earnings for UC).• Child benefit and guardian's allowance.• Pension credit (PC) – unlike now, both partners in a couple will need to be over the prescribed age to get PC, which will also include allowances for children and rent, although in the short-term it appears claimants over PC age will be able to claim tax credits and housing benefit.• Social fund maternity, funeral, winter fuel and cold weather payments.• "Passported" benefits: additional benefits (such as free school meals or free prescriptions) to which claimants on certain other benefits and/or tax credits are automatically entitled.

9. What will claimants be expected to do in return for universal credit?

According to the DWP: "At the heart of universal credit is a partnership between the state and the claimant. In return for receiving financial support, out of work claimants, depending on their circumstances, must look for work, or take steps towards it. This may include preparing a CV, attending training courses, applying for suggested vacancies or registering with a recruitment agency.

"In most cases they must also be available and willing to immediately take up work and attend periodic interviews to discuss plans and opportunities for returning to work (immediately or in the future)."

10. What is all the talk of "digital by default"?

In theory, the introduction of universal credit coincides with a move to online claims, but there is much uncertainty about whether the necessary computer system will be ready in time.

The idea is that claims will be made online, and all subsequent contact between the DWP and claimants is meant to be conducted online. The only exception will be where the DWP authorises a telephone claim.

The government promises: "We want to make the process of claiming universal credit as simple as possible for claimants. Universal credit is being designed so that each claimant can make a claim online and then personally manage their claim directly through an online account.

"Wherever possible, we want claimants to notify us via their online account of any relevant information and changes of circumstance as soon as possible after the change occurs."

For those people who are working, UC will be calculated automatically, adjusting credit payments according to monthly income reported through an upgraded version of the pay as you earn (PAYE) system.

The government accepts that a "minority" of claimants won't have access to a computer with internet, or won't be able to claim online. Campaigners are anxious that the government has been over-optimistic about the number of people who are able to go online to claim.

The government is promising "digital champions" in every jobcentre "to help staff support and encourage claimants to take their first steps online and see the benefits of being able to use the internet".

There is industry speculation about whether a computer system capable of handling all the online claims will be ready in time for the launch.

11. Has the development of the universal credit IT system gone smoothly?

The DWP has repeatedly claimed that the development is on schedule and on budget. Reports from within the IT industry have repeatedly indicated that this is not the case.

The white paper promised that UC "would involve an IT development of moderate scale, which the Department for Work and Pensions and its suppliers are confident of handling within budget and timescale".

Labour has claimed that work on the £500m IT delivery contract has hit serious problems, and has pointed to the departures of several key figures overseeing the development of the computer program.

Computer Weekly notes that there have been four people heading up the project in just six months, and reveals that there will be a new head – Howard Shiplee – from mid-May. "The changes in leadership succession have led to further speculation that the project has hit problems, with reports that the IT behind the project is not ready. However, the department insists that universal credit will be delivered on time and within budget," it reports.

Campaigners are uneasy about the capacity of the government's IT systems to deliver. The Child Poverty Action Group warns: "Predominantly IT-based administration represents a big risk, given the poor record of large-scale government IT projects. The assumption that the vast majority of claimants can initiate and manage their claims online seems unrealistic and may cause difficulties for many claimants. Administration by a single agency could reduce bureaucracy and duplication, but may not necessarily result in a better service."

12. What are campaigners worried about?

•Monthly paymentsThe government thinks this will help promote good budgeting and more closely replicate monthly salary payments – arguing that 75% of all employees receive wages monthly. "This will help smooth the transition into monthly paid work, encourage claimants to take personal responsibility for their finances and to budget on a monthly basis which could save households money. For example, monthly direct debits for household bills are often cheaper than more frequent billing options," the government argues. Campaigners are worried that the shift from weekly and fortnightly payments to this new regime may push claimants recipients into debt. The Social Market Foundation says: "Most households in our sample opposed the idea of a monthly payment. This was the case for the majority of households, who tended to budget on a daily, weekly or fortnightly cycle."

•Direct paymentsThe prospect of stopping housing benefit payments to landlords and directly paying the claimant is causing a lot of unease. The National Housing Federation says the shift from paying landlords to paying claimants direct for the housing benefit element could trigger unprecedented levels of arrears and increased rent collection costs. "Of all the reforms, the introduction of direct payments to tenants is expected to have the biggest impact – more than 80% of housing associations say it will affect their organisations a great deal or a fair amount," an NHF report warns. "84% of associations believe that rent arrears will increase as a direct result of welfare changes. The average increase expected is 51%, which, if replicated across the sector, would mean an additional £245m of arrears."

The government has said that "vulnerable" tenants may be excluded (pdf) and has devised an "automatic switchback mechanism" – paying rent to the landlord when a tenant's arrears hit a threshold level – but there are currently very few details of what constitutes a vulnerable tenant.

There are concerns that more people could be evicted as a result. The BBC obtained figures that showed when the direct payments were piloted in six areas of the country there was a big rise in rent arrears as some tenants failed to pass that money on, with arrears rising from about 2% to 11%.

•Conditionality and sanctions"Entitlement to UC is subject to a strict regime of 'personalised' conditionality (ie mandatory activity to prepare for and obtain work), backed by tough benefit sanctions (ie loss of benefit) for non-compliance," the government says.

The Child Poverty Action Group warns: "The need for more conditionality comes across as a 'moral crusade', rather than being evidence based … There are concerns that some vulnerable claimants could face repeated sanctions for failing to comply with the demands of the system and that personal advisers and the Work Programme (within a culture of 'payment by results') will have too much power and discretion to impose unreasonable requirements on claimants."

The charity warns in a UC training document: "Sanctions, in the form of loss of benefit, are designed to incentivise claimants to meet their work-related requirements and punish them for unreasonable failures. The regime is harsh, and there is concern that some claimants who repeatedly fail to comply with the system could be sanctioned and forced to survive on below subsistence income for long periods. This could include vulnerable claimants with mental health or social functioning problems, who find it difficult to comply with directions."

A high level sanction can be imposed if, for example, a claimant fails for no good reason to take up an offer of paid work. The higher level sanction is the loss of the standard allowance of 91 days for a first failure, 182 days for a second higher level sanction within a year, and 1,095 days (three years) for another failure within a further year (disregarding "pre-claim" failures).

Hardship payments will be available of 60% of the sanctioned amount for those who cannot meet their "immediate and most basic and essential needs for accommodation, heating, food and hygiene".

•Lone parents could lose outThe Institute for Fiscal Students (IFS) calculates that "because of the way the parameters of universal credit have been chosen, couples, and particularly those with children, look set to gain by more, on average, than single-adult families, particularly lone parents, who will lose on average according to our analysis".